Implementation of China’s E-Commerce Law in 2019

After 3 rounds of public consultation and 4 rounds of examinations by the legislators in 5 years, on August 31, 2018, the Chinese Government officially promulgated and issued an “E-Commerce Law of the People’s Republic of China” (hereinafter referred to as the “Law”). The Law took effect on January 1, 2019. This is the first time that China enacted and promulgated a law specifically targeting the e-commerce market.

In year 2017, the amount of national electronic commerce transactions reached RMB29.16 trillion, 11.7% higher than year 2016; the national online retail sales of goods and services reached RMB7.18 trillion, 32.2% higher than a year ago. In year 2018, e-commerce continues to grow in a very fast pace in China. During the first 3 quarters, the national online retail sales of goods and services reached RMB6.28 trillion, 27% higher than that in year 2017. Online sales of goods and services accounted 17.5% of the total retail business.

However, there are several issues emerged from the rapid and largely unregulated development of e-commerce. For example, the real identity of online shop operators, selling of fake and counterfeit products, the lack of protection of consumers’ interests, the lack of protection of intellectual property rights and obligation and responsibility of the e-commerce platform operators. These issues damage the interests of both the consumers and the e-commerce business. Apparently, the existing laws and regulations are not sufficient to support the healthy development of the e-commerce industry. A separate law is needed to regulate the market.

The Law is wide-ranging and covers the requirement for registration and licensing of e-commerce operators, taxation, electronic payment and e-commerce dispute resolution. It also addresses other important aspects of e-commerce including false advertising, consumer protection, data protection and cybersecurity, as well as the protection of intellectual property. Many of the provisions are a codification of the existing laws.

It is expected that the implementation of the Law will bring about positive impact in the development of e-commerce industry in China, in terms standardization and systematic development of the market. However, the requirements for the registration e-commerce system and stricter supervision of taxation will have a major impact on e-commerce operators. The business life of the e-commerce practitioners such as the micro-business and purchasing agent will become smaller. The implementation of the E-Commerce Law will also make the import and export items inspect stricter by customs.

1. Regulation of the E-commerce Operators

In accordance with the E-Commerce Law, the e-commerce businesses mean the natural persons, juridical persons or organizations for non-juridical person that engages in the business activities of selling commodities, or providing services, through the Internet or any other network, including e-commerce platform businesses, in-platform businesses, and e-commerce businesses those sell commodities or provide services through a self-built website.

Micro-business mainly refers to the practitioners using the Internet social media and network as a communication tool to complete the goods and services transactions. In recent years, micro-business has almost penetrated the circle of friends of all people, the entry barriers for such business model are low, no physical store, no business license, and only virtual trading through the network. The E-Commerce Law implemented will include the “other network services” of the e-commerce operators, this is the reason for micro-business to become one of the supervised subjects because it will be incorporated into new forms of e-commerce and design entities, that are engaged in goods and services using the We Chat circle of friends and live webcasts.

2. Application for Business License

In accordance with Article 10 of the Law, an e-commerce business is required to apply and obtain a business license, unless it is an e-commerce business operated by an individual selling self-produced agricultural and sideline product, or home-produced handicrafts, or using his own skills to engage in public convenience services, or occasional and low-value transactions.

Because of low entry barriers and without the need to apply for registration, there are more than one million individual E-commerce operators selling products and providing services through the E-commerce operation platforms and social network platforms. The implementation of the law will change the landscape of E-commerce in China. Most of these individual sellers will now be required to apply for business license. The law also requires all e-commerce operators to ensure that their business license and administrative license information related to their business activities, are prominently displayed online at all times.

3. Taxation of E-commerce

Even before the promulgation of the E-Commerce Law, taxpayers who exceed the thresholds for payment of tax as set out in the tax laws and regulations shall file and pay value-added tax, corporate income tax and personal income tax. For example, in accordance with the China’s Value Added Tax Laws and Regulations, units and individuals that sell or import goods or provide processing, repair, and distribution services in China are all taxpayers of value-added tax.

The E-Commerce Law further clarifies the tax obligations of E-commerce operators. As an e-commerce operator, while enjoying the benefits of being a registered business entity, are required to fulfill the obligation of being a taxpayer. Articles No.10 of the E-Commerce Law provides that E-commerce operators who are not required to apply for business registration should apply for tax registration, file tax return and pay per the requirements of the tax laws and regulations once their obligations to tax arise. Article 11 of the E-Commerce Law further stipulates that E-commerce businesses operators have an obligation to pay of tax payment and also enjoy tax incentives.

Besides, Article 28 of the E-Commerce Law requires E-commerce platform operators to submit the identification and tax-related information of the business operating inside their platforms to the taxation department in accordance with the laws and regulations pertaining to the collection of tax. It also requires the E-commerce platform operators to remind the E-commerce operators operating inside their platform to apply for tax registration in accordance with the E-Commerce Law Articles No.11 once the obligation for payment of tax arises.

In accordance with Articles 25 and 31 of the E-Commerce Law, e-commerce operators are obligated to provide information on their business to the relevant competent authority upon request. Also, E-commerce operation platforms are required to keep the details of transactions processed for not less than three years. Consequently, online stores or sellers operating in the E-commerce platforms, such as Taobao, should prepare books of accounts and file tax returns properly, as now the tax authority can retrieve every bite of information of their businesses from the E-commerce operation platforms.

4. Supervision of the Behaviour of E-commerce Operators

In order to gain the trust of consumers, it is no secret that many E-commerce operators use click farming to create false ratings of their products and services. In the E-commerce industry, click farming seriously damages consumers’ right to know and choose. As such, the E-Commerce Law specifically requires that E-commerce operators should disclose the information of their goods or service information in a comprehensive, true, accurate and timely manner so to protect consumers’ right to know and right to choose.

The E-Commerce Law stipulates that E-commerce platform operators should establish proper integrity rating systems, make public the rules for integrity rating so as to allow consumers to comment the products or services provided. The e-commerce platform operators must not remove any such comments made by consumers.

The E-Commerce Law also provides that if e-commerce operators do not provide consumers with a platform to comment their products or services, or if the consumers’ comments are removed without authorization, the e-commerce operators may be punished with a fine up to RMB500,000.

5. Refund of Security Deposit

The rapid development of e-commerce led to the emergence of a number of new industries such as resource sharing and leasing services. Almost all providers of these new services require consumer to pay a fixed sum as security deposit to use their services. Strictly speaking, the security deposit so collected should be set aside and refunded to consumer upon request. However, because of the lack of regulation, many online service providers instead use the security deposit to finance their daily operation. This results in the service providers being unable to refund the security deposit when their business failed. Fox examples, Wukong, Xiaoming and Cool Ride had stopped their operations due to financing difficulties and consequently were unable to refund the deposit to their customers.

In order to protect the interest of consumers, the E-Commerce Law stipulates that if an e-commerce operator collects deposits from consumers, it shall expressly state the manner and procedure for the refund of the deposits, and shall not set unreasonable conditions. If a consumer applies for the refund of the deposit and meets the requirements, the e-commerce operators shall make a refund in a timely manner.

6. Intellectual Property Protection

Because of extremely low prices, great variety of choices and some other reasons, online shopping has developed rapidly and become a phenomenon in China over last several years. However, the online shopping market is left largely unregulated and competition is very intensive. As a result, E-commerce operators selling fake or counterfeit products is not uncommon.

In response to this situation, the new E-Commerce Law emphasizes the protection of intellectual property rights and set out in detail provisions to protect the rights of intellectual property owners. It lays out in detail the rights of the intellectual property owner to “notification-deletion” and the obligation of the platform operator to “deletion–making public”. Through the strengthened intellectual property protection, allowing the owners of intellectual property the right to notify and report fake products, supplemented with the responsibility of the platform operators to supervise and inspect their retailers, it is hoped that the selling of fake and counterfeit product can be eliminated from the source.

7. Strengthening the Responsibility of the E-commerce Platform

While it is true that e-commerce provides consumers with a greater variety of choices at low prices, there are some cases where consumers’ interests are being damaged and it is very difficult or impossible to obtain compensation, such as the purchase of fake goods, or the incurrence of traffic incidents while using car-hailing platforms. To provide with better protection to the safety of consumers, the Law provides that where e-commerce platform operators know, or should know, that goods or services provided on the platform do not comply with requirements for personal or property security, or otherwise violate the lawful rights and interests of consumers, and they do not take necessary measures, they will be jointly and severally liable with the online vendor. E-commerce platform operators who do not take necessary measures and consequently caused damages to the consumers will be held liable in accordance with the laws and regulations and may also expose to a fine of between RMB50,000 to RMB2 million.

Before the E-Commerce Law came into force, the law enforcement agencies have always imposed penalties on the online illegal activities of e-commerce operators with reference to the Trademark Law and the Advertising Law. After the implementation of the E-Commerce Law on January 1, 2019, E-commerce operators who conduct activities in violation of the provisions of the E-commerce Law can be punished with a fine of up to RMB2 million. In light of the strengthened regulation and increased penalty, it is suggested that e-commerce operators should always operate their online business in accordance with the relevant laws and regulations.

Holding the E-commerce platform operators liable for violations of the law by its online business operators is another important regulation of the Law. Online business operators who violate the requirements of the law will result in the business operation being terminated, the integrity rates being deleted. In particular, the Law provides that online business operators who violates the regulations of the Law may be ordered by the relevant administrative authorities to rectify the situation within a set time and a fine of up to RMB10,000 may be levied. The Law also provides that E-commerce platform operators who do not take necessary actions to regulate those online business operators who violate the Law may be ordered by the relevant administrative authorities to rectify the situation within a set time and a fine between RMB20,000 to RMB100,000 may be levied.